China has just become a global financial giant

China has set up $483bn worth of currency swap deals with a host of nations, which treat Beijing either as a leading trading partner or a blossoming commercial ally, writes Heydarian [Reuters]

China has taken another fateful step towards gaining full recognition as a global economic superpower. The International Monetary Fund recently decided, with the United States' support, to admit Chinese yuan, also known as renminbi, into the "special drawing rights" basket of elite currencies along with the US dollar, euro, pound sterling and yen.

That makes China the second non-Western country, together with Japan, to gain a foothold in the exclusive club of international currencies. Interestingly, China is also the only non-democratic country, with a ruling communist party that continues to hold a tight grip on macroeconomic decision-making, which has managed to make it to the A-list.

The executive board of the IMF, in its latest five-yearly review, assessed the Chinese yuan to have "met all existing criteria" to be considered as an international currency reserve that can "be freely usable" along with other established global currencies. IMF chief Christine Lagarde, the IMF managing director, characterised the decision as an "indication of the reforms that have been implemented and will continue to be implemented" by China.

IMF approves China's yuan as reserve currency

She expressed hopes that China's admission would not only "deepen and accelerate economic reforms and financial opening up" of the country, but also encourage it to "contribute to promoting world economic growth, safeguarding financial stability and improving global economic governance."

In short, the IMF's decision was based on a combination of recognition of existing reforms and realities as well as an expectation of a more open, globally integrated China.

Amid China's economic slowdown and the massive stock market jitters of recent months, which have chipped away at the Asian juggernaut's long-held image of financial invincibility, this was a much-welcomed news for authorities in Beijing, who have been seeking a greater voice in international organisations.

Dollar hegemony

Though the US managed to become the world's leading industrial power in the early 20th century, it took decades before it comfortably replaced Great Britain as the anchor of international economic order.

Its leading role in mobilising international efforts against the Axis powers during World War II, coupled with its virtually intact and expanding economic base throughout the conflict, gave it an unprecedented leverageto almost unilaterally shape the post-war international order.

Given the stubborn deadlock in the governance structure of the IMF and World Bank, China's inclusion in the SDR is more of a palliative measure to appease a disgruntled power than a genuine effort to fully recognise the Asian's power newfound weight in global economic configuration.

While John Maynard Keynes, the British economist, is widely seen as the intellectual architect of the Bretton Woods system, it was his American counterpart, Harry Dexter White, who made sure that the US would firmly dominate the new international economic order for the foreseeable future.

Disregarding Keynes' call for an international reserve currency, which inspired the creation of the special drawing rights, or SDR, White insisted that the US dollar should serve as the ultimate reserve currency.

To be fair, the US, by every metrics, was the pre-eminent economic power throughout the mid-20th century. In a display of enlightened self-interest, it also provided international public goods such as the freedom of navigation in international waters, while aiding reconstruction efforts in war-torn Europe and East Asia, giving birth to economic miracles in former enemy states such as Germany and Japan.

But as Keynes rightly anticipated, Washington would be reluctant to give up its privileged position even when other countries managed to catch up. Worse, the US exploited the dollar's hegemony to build up huge debt and finance unsustainable consumption patterns, which precipitated the 2008 Great Recession.

The result is a US that is financially powerful, and still ideologically dominant in shaping the international economic order, even if its real economy is anemic.

Multipolar order

As the world's leading trading nation, with a massive stock of currency reserves that has allowed it to become a top source of financing for developing countries across the world, China is a global economic locomotive. Thus, China's inclusion in the basket of international currency reserves represents a step towards creating a more diversified and multipolar economic order.

China's earlier decision to devalue its currency based on market dynamics arguably served the double purpose of increasing the yuan's convertibility as well as making China's flagging exports more competitive.

But the IMF's decision to admit China to the SDR club is more of a belated recognition of the country's growing sway in international trade and investment flows, even if Beijing is unlikely to make the yuan a fully-convertible currency in the near future.

Counting the Cost - China's currency wars

From Britain to Turkey and Russia, China has set up 3 trillion yuan ($468bn) worth of currency swap deals with a host of nations, that treat Beijing either as a leading trading partner or a blossoming commercial ally.

This has made the yuan a de factointernational currency. Yet, with China poised to soon become the world's biggest economy, it has yet to enjoy a commensurate voting power in premier international economic organisations such as the IMF and the World Bank.

Thanks to the US Congress' refusal to ratify voting shares reforms in the Bretton Woods system, China continues to suffer from under-representation in the existing architecture of global economic governance.

Given the stubborn deadlock in the governance structure of the IMF and World Bank, China's inclusion in the SDR is more of a palliative measure to appease a disgruntled power than a genuine effort to fully recognise the China's newfound weight in global economic configuration.

No wonder then that China has cruised ahead with establishing alternative international financial institutions, from the Asian Infrastructure Investment Bank (AIIB) to the New Development Bank (NDB), as well as a host of initiatives aimed at revamping the global development landscape with Chinese capital and knowhow.

By hook or by crook, China is reshaping the US-dominated international order.